How Can Traders Make Use Of The Concept Of Open Interest?

If you are a beginner in trading you must spend enough time to familiarise yourself with the various concepts and the terminology in trading. Recently there was quite a buzz about the use of intelligent algorithms to make trading simple even for the absolute newbies. If you are trading options you must have come across the term ‘open interest’. So here we talk a little about open interest and how you can use it as a trader.

What is open interest?

This is relevant in futures contract and options trading where open interest is the number of open or outstanding futures or options contracts. This number would be changing every day as the number of available contracts might change as well. When there are contracts bought and sold at the same time, when an exchange happens then there might not be a difference in the value of the open interest. Open interest is relevant when there are new contracts being created.

Bullish and bearish trends can be identified using open interest

When there are situations in the market where the open interest is high and the volume of trading is also high then it indicates a strong market. For the situation when prices are falling, when the volume of trading, as well as the open interest, are both down then this again denotes a strong market. When there is an increase in the price followed by increased trading volume and open interest it can indicate the possibility of money flow in the market which is a bullish trend. Thus when open interest increases in a market that is following an upward trend or when it declines in a market that is dropping would indicate the occurrence of bullish trends.

Open interest can be used in futures options as well as in stock trading

Futures and options traders are the ones who use this concept the most. But even the stock traders can use the results to fine-tune their observations of the market and get a clearer picture of the market trends on the whole. The indication of bullish and bearish markets can help the trader decide whether to go short or to hold on to the stock for a longer duration. This would help take critical buy and sell decisions for stocks that are heavily influenced by the market trends. But remember that a combined study of the trading volume, open interest and a combination of other technical indicators would be the most dependable option.